The practice of sub-letting a residential rental property to another landlord, a property management company or a local authority, (sometimes referred to as rent-to-rent or guaranteed rent) is an arrangement that many property owners have found an attractive prospect.
There are advantages in this for both parties: the property owner gets a guaranteed rent for the three or five years’ contract, and the property is guaranteed to be returned in good condition, all signed by the middle manager (we will call him or her the landlord) on a legally binding contract.
For the manager, they get to rent out the property as if they owned it and collect a full market rent from the tenants, paying the owner a lower sum, pocketing the difference. If the middle man divides the house and lets by the room, the arrangement can be extremely lucrative.
That’s certainly the story touted by the so called property “gurus” who run their courses advising novice would-be landlords how they can get started in property with no money – “become a property millionaire and give up your rat-race day job”, is often their line. But remember, the reason why “guru” has become so popular is simply because charlatan is hard to spell!
This is an area that’s fraught with problems and difficulties. For some extreme examples take a look at Paul Shamplina’s new series, “Extreme Nightmare Tenants”, Thursday nights on Channel 5 TV.
These so call middle men – unless you are dealing with a reputable company or local authority, and even then you need to look out – are often less than reliable. They will wreck homes by dividing them for multi-occupation, they will operate them without HMO licences, they will fail to pass on any rent and they will return the property, if you are lucky, in a run-down state.
Something like this occurred in the Goldsbrough & Anor v CA Property Management Ltd case at The Upper Tribunal (Lands Chamber) (2019).
Recent legislation has introduced something call a Rent Repayment Order (RRO), where a court, or in this case a tribunal, can order a landlord to re-pay rent in compensation to a tenant where the landlord was letting the property illegally, in this case without the requisite licence.
The question before the tribunal was – as two of the tenants had filed a RRO, because they discovered the absence of an HMO licence – who re-pays the rent? Is it the head landlord (the owner) or is it the sub-letter middle man, the management company “under” landlord? No licence meant the two tenants were entitled under the Housing and Planning Act 2016 to full repayment of their rent during the unlicensed period.
You would naturally assume here that the owners were well and truly out of it because they have sub-let to a management company that had taken on full responsibility; not our problem would be the owners – Mr and Mrs Gardiner’s – response.
Well, you probably guessed what’s coming: no said the tribunal! Despite finding that the management company was in fact the landlord, the tribunal was faced with a challenge from the two tenants. They argued that the company was acting merely as agent, and that the owners of the property were in fact liable.
Quite surprisingly the tribunal agreed with the tenants and held that the owners of the property were liable to re-pay the full compensation. The Housing and Planning Act 2016 states that a RRO can be made against “a landlord” but it does not specify that it must be a “direct” landlord, concluded the tribunal.
Whether this is the final word on the matter is open to question, should there be an appeal. But for now the principle stands: a court or tribunal could go for one or the other or both landlords to re-pay. A lot would perhaps depend on the solvency of the parties involved.
There are some important lessons from all of this:
- Great care is needed when entering into a rent-to-rent arrangement unless, you are certain the under landlord (property manager) is reputable.
- Legally the arrangement is complex and requires a water-tight commercial contract – an AST simply will not do.
- Owners should seek legal advice before signing any sub-letting agreement.
- Make sure the property is properly licensed and meets all the regulatory requirements for the intended use.